Auto Industry

Difficult terrain

Chery seeks okay to JV with Jaguar Land Rover

Soon to be made in China

Li Shufu is hoping for a slamdunk. According to Bloomberg, the car tycoon is in negotiations with basketball sensation Jeremy Lin to endorse Volvo, the Swedish brand that he bought in 2010.

The hope? That the New York Knicks point guard (see WiC139) will drive sales of the car ‘Linsane’ in China (Volvo sold 47,000 vehicles in the country last year).

But it is news of another negotiation that is more intriguing for many in the auto industry. Late last month, Li’s car firm Geely announced a joint venture with Volvo – the goal being to develop and build cars in China.

Why is Li arranging a JV between two companies he already owns?

The move serves to highlight the quirky nature of China’s regulatory system. The National Development and Reform Commission (NDRC) regards Volvo as a foreign brand. So despite Volvo being Chinese-owned, the rules require that a JV is set up with a local car firm. Only then will Volvo get permission for a Chinese factory.

According to insiders, localising production could save Geely Rmb1.5 billion ($237 million) annually, which explains why Li sees the wisdom in joint-venturing with himself.

The JV route remains the key path into the China car market, as another foreign firm made plain last week.

Jaguar Land Rover and Chery Automobile announced they would also be forming a joint venture, in their case to produce the iconic British off-road vehicle. The project will see Jaguar Land Rover invest $158 million in a new plant to produce 50,000 of its popular SUVs annually.

The project won’t be up-and-running till 2014 and, interestingly, it’s yet to get NDRC approval, which could indicate a behind-the-scenes battle between the local and central government.

The local government in question is the Changshu Economic and Technological Development Zone, located in Jiangsu province. Its officials are keen on auto investments, especially given the zone’s goal of becoming a Rmb100 billion industrial cluster. And it was local officials that went public about the Land Rover and Chery deal last week – even though the NDRC (which stands for National Development and Reform Commission) had yet to green-light it.

The tactic may have been designed to put pressure on China’s top economic planner. As reported in WiC133, the NDRC recently took the car industry off a list that “welcomed” foreign investment, due to its concerns about overcapacity. As a foreign investor that’s looking to build a factory, Jaguar Land Rover would seem to be ‘unwelcome’, based on the new policy.

If anything, concerns about oversupply would have been exacerbated by the January and February data, which showed car sales in China falling 4.4% on the same period last year. But analysts appear confident the deal will get the NDRC’s eventual sign-off, although not until the summer.

Jaguar Land Rover’s management will hope the deal is approved, as its China sales are booming: rising 61% last year thanks to demand from the nation’s newly affluent. Indeed, the company’s local boss told NetEase Auto that China is set to overtake both the UK and US to become its largest market by 2013.

Changshu will be Jaguar Land Rover’s first production base outside the UK and the Economic Observer also reports that a broader strategic imperative may be at play in the tie-up. Since India’s Tata Group bought Jaguar Land Rover from Ford in 2008 it has been looking to reduce its dependence on Ford engines installed in its vehicles. The Chery JV will establish a new R&D centre and also an engine plant. Chery insiders confide that they have developed new technology that could eventually be substituted for Ford’s engines.

The tie up might also see the resolution of another problem facing Tata. As reported in WiC100, the Indian firm has been in dispute with Geely over who owns the Land Rover trademark in China.

If the JV deal does go through, presumably the trademark spat will be one of the first items that the two sides have on their common agenda.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.